Offshoring Vendors Slice 15 Percent Off Some Deals

The Satyam scandal and the economic downturn have services providers more than open to deals, outsourcing experts say.Sarah Johnson, CFO.com | USFebruary 3, 2009

Outsourcing service providers are shaving as much as 10 percent to 15 percent off existing contracts in order to keep their customers during these uncertain times, according to A.T. Kearney, a consultancy.

In a white paper released this week, the firm notes that vendors have become more flexible in their pricing and are accepting lower margins on agreements. They're waiving some of their clients' start-up costs or amortizing those costs over the length of the contract. In some cases, they're extending credit and payment terms. What's more, service providers are agreeing to renegotiate existing contracts so that they don't lose business — a growing concern for an industry whose rapid growth earlier this decade has slowed in recent months.

The outsourcing industry has taken many financial and reputational hits lately. Consolidation on Wall Street has especially hit the vendors hard, since financial-services firms provide 30 percent of outsourcing firms' IT and back-office business, according to A.T. Kearney. On top of that, offshoring firms are dealing with defending their stability as the accounting scandal at India's fourth largest service provider, Satyam Computer Services, continues to unfold and the country is still reeling from the terrorist attacks in Mumbai.

As a result, says A.T. Kearney partner Uday Singh, outsourcers are hungry for work and have been giving their new and existing clients more of the upper hand over the past three months. "We firmly believe it's a buyer's market," Singh told CFO.com.

To be sure, many companies have more immediate concerns than taking a fresh look at their outsourcing strategies or worrying about whether to take advantage of low-cost wage options like those offered in India. "Many companies right now are looking at mere survival, and saving 10 percent here or 5 percent there probably isn't going to be a deal breaker," says Phil Fersht of AMR Research.

Besides the current paucity of buyers, outsourcers are dealing with economic uncertainty in their own countries, the higher value of the U.S. dollar, tighter competition, and President Obama's pledge to reward companies for not moving job overseas (although A.T. Kearney believes the administration will concentrate on manufacturing work and not IT and back-office jobs).

At the same time, outsourcing vendors will be focusing their clients' renewed interest in pulling back on their risk comfort level. Companies don't want to put "all their eggs in one basket" and are spreading out their outsourcing risk among vendors and locations, such as the Philippines and Malaysia, Singh says. Moreover, customers are favoring more big-name, tier-one service providers following the Mumbai attacks. Customers feel that better-known vendors have more mature business practices and may have better security controls, Singh explains. "They don't cut corners," he adds.

Some suppliers are trying to use India's problems to their advantage. China IT outsourcer Freeborders Inc., which is based in San Francisco, recently advertised "zero cost transition" for moving customers from Satyam to using its services. Satyam clients have been moving work to IT vendors they already have relationships with when they should be further diversifying and considering new suppliers, Freeborders CEO Jean Cholka contends.

Vendors themselves are looking to diversify. To expand their client base and put less reliance on any one industry, they may be more aggressive in making deals with companies relatively new to them to expand their customer portfolio, Singh suggests. Consumer-goods makers might be a prime new target, for example.

From their point of view, companies aren't likely to automatically reward the cheapest-priced vendors, thinks Peter Allen, a partner and managing director for TPI, an outsourcing advisory firm. "Clients are tending to ask themselves whether the lowest-price approach doesn't introduce unacceptable levels of operational risk," Allen says. "Business resilience comes at a price, and these recent events accentuate the importance of paying that price."